Asia Wrestles With a Flood of Cash

Asian Central Banks Struggle to Tamp Down Strong Currencies

HONG KONG—Central banks in Asia, Australia and New Zealand are ratcheting up moves to deal with an influx of capital that is keeping currencies strong and complicating efforts to manage growth.

New Zealand's central bank said Wednesday it intervened in foreign-exchange markets to blunt the rise of its currency and would continue to do so, a day after Australia's central bank cut interest rates to a record low and noted the stubborn strength of the Australian dollar. Elsewhere, China is moving to curb bets on the rising yuan, while Thailand is considering efforts to curb the strongest baht since the 1997 Asian financial crisis.

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In a surprise move early Thursday, South Korea cut interest rates by a quarter of a percentage point, as the country grapples with a slowing economy. The cut in borrowing costs comes a day after a government official voiced concern about "one-sided" moves in foreign exchange, code for a rise in the value of the currency.

The surging flows to the region are one more example of how investors are scouring the globe looking for higher returns on their money. Many central banks in the developed world are pumping in money in a bid to spur their economies, sending interest rates down and money flowing into alternative investments. In another example, the yield on junk bonds—like emerging markets, generally considered high-risk, high-reward investments—fell below 5% this week as investors flocked to the securities. Yields fall as prices rise.

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Stacks of Thai baht at a bank in Bangkok. Monetary officials have called the currency's gains 'not justified.'
Bloomberg News

The Wall of Money

Ultra-loose monetary policy of the Federal Reserve, European Central Bank and Bank of Japan is leading investors to expand their horizons on their search for yield.

"Asia is still where the growth is, relatively speaking. It's quite clear where the money will go. Asia is benefiting from that front," said
Craig Chan,
foreign-exchange analyst for Nomura in Singapore.

Information from data provider EPFR Global shows that investors have added nearly $7 billion to Asian emerging-market bond mutual funds this year, similar to capital inflows that occurred in 2010. A World Bank analysis of flows to emerging markets globally shows an increase through April of 42% from a year earlier, to $64 billion.

Related

Another measure: Asia's central banks are again scooping up capital inflows and putting them into foreign-currency reserves. World Bank data show that developing Asian economies have added $120 billion in foreign-exchange reserves this year, bringing total reserves to nearly $4.3 trillion.

While attracting investment from overseas is often a good thing, left unchecked, inflows make local currencies stronger, which causes a country's goods to become less competitive on the global market. And government policy makers worry that money that arrives quickly can leave just as fast, destabilizing local banking, stock and currency markets.

"The dilemma these central banks face is they could respond to inflows by cutting interest rates…but in some economies you have overheating risks and asset bubbles" that would be made worse with easier monetary policy, said
Stephen Schwartz,
economist for
BBVA
in Hong Kong.

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The People's Bank of China has moved to curb bets on a rising yuan.
Bloomberg News

The Philippines, whose sovereign credit rating was upgraded to investment grade by two rating firms over the past two months, has been fighting the so-called hot-money inflows with several measures, including making it easier for locals to take money abroad and lowering a deposit rate for banks that do cross-border business.

The effect in Asia isn't uniform, as the U.S. dollar has had broad strength globally. In some countries, such as India and Indonesia, currencies remain weak because of trade deficits.

And compared with 2010, when Asian central banks routinely intervened in currency markets, this year has been less dramatic.

It is too early to assess the full extent of the flows, but some analysts figure the amount of money coming to Asia is less than in 2010. And unlike then, the U.S. is performing well and is attracting money from many investors.

In China, speculators are diving into the yuan, betting its recent rise will continue. Beijing responded on Sunday with a bid to stanch upward pressure on its currency by forcing banks and exporters to sell yuan in favor of dollars.

Regulators also issued a warning to exporters, who have been suspected of sneaking money into the country through accounting maneuvers related to the invoicing of goods.

Thailand's central bank has been under pressure from the government to intervene aggressively to tamp down the strength of the baht. The central bank issued a statement April 30 noting that the "rapid appreciation" of the baht was "not justified by economic fundamentals."

The bank promised to work with the government on measures to respond. No official announcements have been made, but analysts expect either a rate cut or other moves to stem capital inflows.

The Philippines cut rates on certain deposits last month to slow the speculative inflows that authorities fear could flee quickly in a market rout.

So far, though, the moves haven't made much of a dent in these strong currencies. While Australia's central bank cut interest rates on Tuesday for the seventh time since late 2011, the Australian dollar has fallen only about two cents against its U.S. counterpart over that time period.

Buoying the Australian dollar has been strong demand from overseas investors. More than 70% of Australian government bonds are held offshore—double the level in foreign hands a decade ago.

In New Zealand, the head of the central bank said the bank has intervened in currency markets to slow the appreciation of its currency, but admitted there was only so much it could do. "We would not expect, given the strength of the flows, that intervention would materially change the level of the exchange rate, but we could take potentially the tops off rallies," said
Graeme Wheeler,
governor of the Reserve Bank of New Zealand.

His remarks sent the Kiwi tumbling nearly a penny in Asian trading Wednesday. The governor also said the Kiwi was "overvalued…perhaps significantly," signaling the currency's high level remained a concern.

The extent of Wednesday's intervention wasn't known. In December, the central bank sold nearly 200 million New Zealand dollars (US$169 million) in the most significant sale in nearly four years, official data show. The pace of sales slowed early this year, with the central bank selling only NZ$28 million in the first three months combined. The Reserve Bank is due to release foreign-currency transaction data for April later this month, and some analysts say the intervention may have gathered pace again.

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